Tag Archives: Seeking Alpha articles

Posted onMarch 18, 2013|Comments Off on The Carry Trade Is Not Dead – It’s Just Evolved

My Seeking Alpha article last week on the Mexican peso’s post-rate cut rally prompted this response by a reader:

“Capturing the interest rate differencials across currencies used to be an fx trade, but global monetary accomodative policy has taken the juice out of the carry trade for fx traders. The carry trade has increasingly become a fixed income trade where real money has more tolerance for fx volatility in order to capture higher global yields. To that extent, currencies will in fact benefit where there is a belief that local rates are too high.

I don’t expect further rate cuts, Ulysses. I think the 50bp was an attempt at normalization, perhaps partially due to the increase in real money flows into Mexico that were screaming that rates were too high. The irony that you point out about a stronger peso can probably be attributed as much to the ratings upgrade and correlation with a recovering US dollar. Mexico’s reputation for strong policymakers as well as the convergence of business cycles with the USA, makes it a good laggard candidate to get some beta on the USA. That said, it’s a bit overbought and needs to consolidate if it is going to push much lower.”

To the extent that the Mexico exchange-traded fund, which goes by the ticker EWW, correlates with the peso, it looks like this overbuying has already been priced in. Whether looking at this in terms of absolute price or in terms of returns, the March 8 rate cut coincided with a brief bump in the EWW price which has now reversed course, while the peso remains up. This gap will have to close at some point. The question is when:

And here’s what the EWW vs. peso relationship looks like over the past year:

Posted onMarch 13, 2013|Comments Off on The Carry Trade Is Dead. Long Live The Carry Trade.

My latest Seeking Alpha article is out, in which I try to make sense of why the Mexican peso is strengthening on the heels of an interest rate cut by the Bank of Mexico on Friday. And the short answer is that the carry trade is dead. Read the rest here, but what I can add to this argument is actually something that I’m surprised nobody has taken me task for in the comments section yet and that is this: the carry trade isn’t entirely dead. Brazil is in all likelihood about to raise rates again and the expectation is that this is going to strengthen the real.

Which raises the next question: Why is the Mexican peso resorting to the theory of interest rate parity while the Brazilian real is is adhering to the anti-theory of interest rate parity in the form of the carry trade?

What I’m about to put here has gone through many evolutions. The latest came out in the form of a Seeking Alpha article which I just had published the other day under the headline, “A Preliminary Case For Chile Over Mexico.”

For a couple of weeks now I’ve been looking at the merits of either buying the Chile ETF (ticker: ECH), shorting the Mexico ETF (ticker: EWW) or both. And by the way things have been looking recently, not only do my instincts look about right, but I may have even missed the boat. For those who have been watching the elections in Italy, the fallout for the euro has been pretty hard, on the order of 300 bps in Monday alone. So what does this have to do with Latin America? Well, a lot, actually. I initially wrote about this back in June last year for Seeking Alpha here, and apparently my thesis still holds.

I am humbled, honored, grateful and excited to once again present Che Misterio in Argentina, who continues endangering his life for the purpose of shining a light on one of the blindest of economic blind spots in the world today: Argentina’s black market in foreign exchange. Che previously enlightened us in this space on the topics of Big Mac inflation and street level economics. The following was first published on Seeking Alpha under my name in a version suited to that publication’s editorial format, entitled, “How to Navigate Argentina’s Black Market in Foreign Exchange”. Below is the original as submitted by Che Misterio.

Ladies and gentlemen, Che Misterio:

Where Next for Argentina?

By Che Misterio

It is no secret that Argentina is now a two-tiered society. There are those with hard currency for whom the standard of living is quite cheap, and who are therefore immune to chronic inflation as their dollars and euros appreciate even quicker than prices. And then there are those without hard currency, and they live a precarious existence, to say the least: they cannot save their pesos, and even if they could it would be pointless as inflation rages on despite government insistence to the contrary; flagging confidence in the national currency and ever tighter regulations on foreign exchange means the only way to acquire a meaningful amount of hard currency is to pay an expensive premium on the black market.

I am grateful to belong in the first tier. I exchanged some euros recently on the black market, despite the terms being rather nebulous. For those unfamiliar with the street level workings of Argentina’s informal economy, this does not involve some suspicious character in dark sunglasses manning a backstreet stall flanked by security guards with black ear pieces protecting the stash. This was in an otherwise regulated bureau de change on a busy street, staffed by a man of average height, weight, complexion—what those in show business refer to as “the everyman look.”

“Roberto” was the code word a friend of mine had given me for signaling to this bureau de change that I wanted to transact at the black market rate. The man turned his back to me and knocked on the tinted glass of the door behind him. The door made a slight clicking sound as the magnetic lock loosened and the door opened. The man disappeared through the doorway and the door closed and locked, leaving me alone to wait. Two minutes later, the door re-opened, and he beckoned me to enter.

Posted onJanuary 16, 2013|Comments Off on Chart of the Day: The top 10 stock exchanges of 2012

This is actually going to be a few charts, because the first chart as you can see looks ridiculous:

It should go without saying that there’s something very wrong with this picture, and indeed Miguel Octavio sums it up better than anyone I know here, but the long and short of it is that runaway inflation and an ass-headed capital controls regime has wildly overstated the “returns” in Venezuela. So let’s get rid of Venezuela and look at how the rest of these stack up against the Dow Jones Industrial Average. Here’s what we get:

I’m very excited to introduce the second installment of Street Markets 101 today (go here for the first installment), submitted by a guest writer in Argentina who for professional and security reasons is unable to use a real name. I modified this to suit a different editorial format for publishing last week on Seeking Alpha under my name with the headline, “A Street Level View Of Argentina’s Economy, The Peso And ARGT” (see here for the Seeking Alpha version) , but I could not have done it without the help of the source. Today, I present the original unabridged version. Without further adieu:

Ground Zero in Argentina

By Che Misterio

The nationalization of YPF, the falsification of economic data, inflation, mounting street protests and the volatile commodity prices…. these are all fascinating points for the international community to examine in any assessment of the unfolding crisis in Argentina. What has failed to reach the general audience is the impact of the CFK government upon the layman, particularly beyond the confines of Buenos Aires.

I am an economist and live in the “provinces”. I am not Argentine, but am intrigued by the ability of the Argentines to adapt to economic mis-management effectively and creatively. I assume this is simply due to a century of practice. Consider the following impacts on the layman:Continue reading →

The confusion kicked off with an announcement from President Michael Sata’s government that a plan to rebase the currency by three decimal places has since been put on hold. Meanwhile, it has outlawed the use of foreign currency in domestic goods and services transactions, with penalties for transgression that include up to 10 years in prison. The immediate upshot of this measure was a short-term appreciation for the kwacha as Zambians rushed to sell dollars through official channels. Continue reading →

The election of a new Mexican president recently offers a good opportunity to review the major influences on investment performance in Mexico and whether any of them will change now with a different party in power.

To make this judgment let’s first clarify the relevant investments, and then the influences that most affect their values. The most common ways to trade Mexico on a retail level include ADRs such as América Móvil, Coca-Cola FEMSA, Telmex, Cemex, Homex, the MSCI Mexico Index Fund (EWW) and to a lesser extent, the iShares S&P Latin America 40 Index (ILF), SPDR S&P Emerging Latin America (GML) and iShares MSCI Emerging Markets Latin America Index Fund (EEML).

These investments are limited mostly to consumer goods, telecommunications and real estate, alongside a smattering of the country’s famous monopolists, financial sector plays and a few multinational subsidiaries. For institutional investors, also of interest may be the peso’s relationship with the dollar, Mexican government and corporate bonds, the central bank’s general worldview (more specifically, its plan for controlling inflation and its stance on capital controls), and broader macroeconomic indicators.Continue reading →

Posted onJune 27, 2012|Comments Off on Not All ‘Failed States’ Are Failed Markets And Colombia Stands Above The Rest

How do we quantify political risk?

This is one of the big questions underlying the recent release of the eighth annual Failed States Index, a joint effort from Foreign Policy Magazine and the Fund for Peace. This index should give all emerging and frontier markets investors pause, at the very least to reconsider how to assess risk in markets where information availability lags far behind North American and European standards.

For those unfamiliar with it, the Failed States Index intends to rank countries according to-and this is my paraphrasing of the effort in a concise manner-how vulnerable a government is to collapse into anarchy. It takes into account a variety of inputs describing the social, economic, political and military states of affairs in 177 countries.

A quick perusal of the 2012 ranking yields a number of countries in the high risk end of the spectrum that feature prominently in several ETFs: GlobalX FTSE Colombia GXG, Guggenheim’s BNY Mellon Frontier Markets FRN, Market Vectors Africa AFK, iShares Thailand Index Fund THD, iShares MSCI Philippines EPHE, Market Vectors Egypt Index EGPT, FTSE Andean 40 AND and Market Vectors Indonesia IDX, to name just a few. And this does not include the increasing array of blue chips now depending on these very markets to sustain growth, ranging from Coca-Cola KO to General Electric GE to Glencore GLCNF.PK.

The objectivity of specific variables is certainly up for debate, but given how wide ranging the criteria are, disproportionate influence of any one variable is sufficiently mitigated, resulting in a compelling picture for the world’s frontier markets. While the so-called CIVETS acronym is gradually trending higher as a discussion framework for this niche of the investment universe (as shorthand for Colombia, Indonesia, Vietnam VNM, Egypt, Turkey TUR and South Africa EZA), the context of how Colombia is perceived vis-à-vis state failure compels a more appropriate comparison first. The following bar chart shows annualized historical returns of local stock market indices for the highest risk countries in the index that are tradable on a retail basis:

Posted onJune 6, 2012|Comments Off on The fates of the Mexican Peso and America Movil lie in the Eurozone Crisis

America Movil’s financial management and market positioning surely contribute to its stock performance, but equally important is the relationship between the Mexican peso and the U.S. dollar. Of all the major Mexican ADRs, America Movil, and the iShares Mexico ETF EWW most closely mirror the USDMXN currency pair, which a simple 5 year chart makes rather clear (Cemex and Homex are of course in far worse shape due in part to their concentration in real estate):

In addition to the clear correlation of both America Movil and EWW to the peso, the more significant takeaway from this chart is that both securities underperform peso weakness to a much greater extent than they outperform peso strength. Given this apparent reality, examining the peso’s behavior should provide some indication of what to expect for both and going forward.

Posted onMay 22, 2012|Comments Off on The Rupee Has More Room To Fall, But At Least It’s Not Infosys

By now the cat’s out of the bag: The Reserve Bank of India cannot fight the run on the rupee.

From a macro standpoint, India’s prognosis is a pretty difficult one to put a positive spin on, except perhaps that it’s probably not too late for a shorting opportunity. The rupee is at historical lows, foreign portfolio flows are low and going lower, and retail inflation at more than 10 percent handcuffs the central bank’s ability to cut interest rates further. And so a cycle has begun of rupee weakness driving higher inflation, which will drive further rupee selling.

Posted onMay 15, 2012|Comments Off on 3 Reasons The Russian Ruble Is The Least Risky Investment Under Putin 2.0

As if to complement the return of Vladimir Putin to Russia’s presidency, the Russian ruble last week returned to exactly the same level as two years ago:

As Putin 2.0 gets underway, I thought this a timely opportunity to review how the ruble has arrived at today’s exchange rate and where we should expect it to go from here. Read the rest of the article at Seeking Alpha here.

Related listening: Business Monitor International’s Risk Watchdog discusses the political elements of the Putin 2.0 modernization drive here. Particularly relevant is that BMI is expecting Brent crude average price for this year to be $150.

Posted onMay 7, 2012|Comments Off on What’s Next For Egypt’s Economy After A Currency Devaluation?

After solid gains at the beginning of the year for Middle Eastern ETFs, performance has foundered in no small part due to heightening fears of a currency devaluation in Egypt.

It’s been a few years, but there was a time not long ago when currency devaluations were much more frequent. Should Egypt indeed devalue the pound, reviewing this recent history raises certain questions for Egypt’s immediate outlook that beg to be answered.